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September 19, 2013

Gross, Gundlach Cheer as Fed Holds Off on ‘Death Swim’

Market was ready to accept the beginning of the unwind, says Glenmede’s McGough

“Well, first of all, a shout-out for PIMCO and a victory lap for PIMCO — we’ve been talking about buying the front end [of the curve] for the last several months, and boy, have we seen it today,” the PIMCO chairman told CNBC. “So, a little pat on the back for PIMCO in terms of the commercial.”

Gross went on to add, “This has been a handoff from the Bernanke Fed to the Yellen Fed. A Yellen Fed that is dovish with a capital D, one that tapers less, that tapers less fast, more slowly, that ultimately provides forward guidance and that keeps the policy rate at 25 basis points for a long, long time.”

Although Gross is known for his colorful prose, especially in his monthly outlooks, it was his up-and-coming competitor, Jeff Gundlach, who described events with an anecdote.

“There’s an interesting site on Niagara Falls’ Canadian side where, after the falls, the narrow water gets compressed into the Niagara Gorge,” Gundlach (left), DoubleLine Capital’s CEO and CIO, told a Web seminar audience Wednesday afternoon. “Somebody built an elevator there… that can go down to the edge of the gorge. Back when they weren’t diverting water to drive electric turbines, the rapids were 40 feet high.”

He noted that after the elevator was installed, a world-class swimmer was challenged to swim across the gorge. He went down to the water, and while he may have second-guessed taking the bet, the swimmer made two strokes and was sucked under. His body was found downstream.

“The Fed had seemingly promised to taper, but like the fellow who hesitated before jumping into the rapids, the data did not support the idea of tapering,” he related. “The Fed decided not to go in for the death swim. The economy is much weaker than [we and the Fed] thought. Zero interest rates will stay in place for a long time, beyond Ben.”

“Most poor performers during the interest rate back up are seeing strength after the announcement,” he said, adding that markets now anticipate the Fed raising rates in May 2015 rather than the previously expected January 2015.

But, one very important questions remain, McGough argued: If tapering is not appropriate now, then when?

“The timing will never be perfect,” he concluded. “The market was ready to accept the beginning of the unwind.”